The U.S. Bankruptcy Code outlines the rules and procedures for six types of bankruptcy actions. Of these, Chapter 7 covers liquidation -- the sale of nonexempt property and assets -- to pay a portion of outstanding debts. This type of bankruptcy is an option for individuals and small-business owners who can establish eligibility by passing the Chapter 7 means test. According to the legal website Nolo, it usually takes from four to six months to complete a Chapter 7 case from start to finish.
Exempt vs. Nonexempt Property
Although the term "liquidation" may seem to imply that filing Chapter 7 will result in the loss of assets and property, federal and state exemption laws often protect most of what a debtor owns. According to the U.S. Department of Justice, about 96 percent of all Chapter 7 filings are no-asset cases in which all or most of a debtor’s property is exempt from seizure for liquidation.
Exemptions cover property such as your home, vehicle and retirement accounts, up to a certain amount. Although all states have their own sets of exemptions, some states allow debtors to choose between state and federal bankruptcy exemptions. The federal exemption protects up to $22,975 of the equity in a debtor’s home through 2016, up to $3,675 in a debtor’s vehicle and up to $1,245,475 in an Individual Retirement Account. Federal exemptions are increased every three years.
Federal and State Wildcard Exemptions
Federal and many state bankruptcy laws provide a wildcard exemption to protect property that might otherwise be nonexempt. Check your state’s bankruptcy exemption laws to find out whether you can use the federal wildcard exemption and if your state offers one. State wildcard exemption limits vary. The federal wildcard exemption for a single filer is $1,225 plus any unused portion of the homestead exemption up to $12,250. The wildcard exemption for a married couple filing a joint Chapter 7 is double this amount.
Dischargeable vs. Nondischargeable Debt
Chapter 7 bankruptcy covers unsecured debts such as credit cards, medical bills, signature loans and collection accounts. It also covers secured debts such as a vehicle or your home, but if you discharge the debt, you must surrender the property back to the lender. After a bankruptcy judge issues a discharge order, the debtor is released from any further responsibility for repaying the debt.
Nondischargeable debts are those that a Chapter 7 doesn't cover. They include tax liens, student loans, child support, alimony and debts for judgments in certain lawsuits.
Some debts can be either dischargeable or nondischargeable depending on the situation. For example, past-due federal income taxes may be dischargeable if you meet certain conditions. The rules for this are complex so if you're looking to discharge this type of debt, speak with a lawyer or legal aid to find out if you qualify. If you reaffirm a debt -- either secured or unsecured -- it survives Chapter 7 bankruptcy. A reaffirmation agreement is a new contract with the lender in which you agree to keep paying on the account so you can keep the collateral, provided you can cover any equity you have in it with an exemption.
The Chapter 7 Time Frame
Although a Chapter 7 bankruptcy usually takes no longer than six months to complete, some take longer and some finish in a shorter time frame. According to USCourts.gov, a discharge order is usually issued about 60 days to 90 days after the meeting of creditors, which takes place relatively early in the proceedings.